Chinese companies eager to establish a foothold in Hong Kong before a widely anticipated stock-trading link between the city and China opens this year are gobbling up small brokerages as never before.
Six Hong Kong stock-brokerage and fund firms have announced deals this year, and one transaction, involving Shanghai conglomerate Fosun International Ltd. , has been completed. Two others are awaiting Hong Kong regulatory approval and three are under discussion.
In the previous three years combined, just two Hong Kong brokerages were acquired by Chinese firms, according to figures provided by Dealogic.
Last month, in the most recent of the approaches by Chinese firms, Tianjin Binhai New Area Construction & Investment Group Co., a state-owned real-estate company, bid US$87 million bid for 51 per cent of Cash Financial Services Group Ltd. The companies couldn’t be reached for comment.
Brokerages number in the hundreds in Hong Kong, a city of seven million people. Participation by small-time retail investors is high, and brokerages are favorite haunts of retiree day-traders and investors trading tips.
But the brokerage companies have seen their dominance in trading Hong Kong stocks wane in recent years, as Wall Street firms and giant commercial banks such as HSBC Holdings PLC capture more business.
This year, the pending opening of China’s huge stock market to anyone with a Hong Kong trading account has spurred the wave of buying of the city’s brokerages.
The Shanghai-Hong Kong Stock Connect Scheme is a trading link that regulators have said will begin operating sometime this year between exchanges in the two cities. It will open up access to US$2 trillion worth of Chinese stocks in Shanghai, according to analysts, while allowing mainland investors to buy into Hong Kong. The Hong Kong stock exchange hasn’t said when the trading link will start, but when it does, China’s stock market will be opened up to foreigners other than the institutional buyers that now have quotas giving them access.
Owning a Hong Kong brokerage would let a Chinese owner maximize the benefits of attracting Hong Kong clients into China stocks, said Jeffrey Chan, chairman of Hong Kong Securities Association Ltd., a nonprofit industry group whose 1,100 members make up more than 70 per cent of the city’s stockbroking community.
Unlike in Shanghai, Hong Kong’s capital markets are open to anyone with a Hong Kong brokerage account, and such accounts aren’t restricted to Hong Kong citizens.
Fosun recently bought Hani Securities (HK) Ltd., a retail brokerage in Hong Kong that has around 2,500 clients who actively trade. Fosun said that buying Hani will give it both a foothold in Hong Kong and a base from which to set up a fund-management company.
“It may take you just two to three months to buy a business, but it may take four to six months to start from zero,” Mr. Chan said, adding that if the target is a listed stockbroker, the acquirer can also raise funds through selling shares.
Steven Sun, head of China equity strategy at HSBC, said that if the Hong Kong stock exchange is connected to both of China’s stock exchanges, in Shanghai and Shenzhen, that would make it the second-largest stock market in the world, based on trading figures last year. The New York Stock Exchange is now the world’s biggest by market capitalization, followed by the Nasdaq Stock Market, while Hong Kong is in sixth place globally, ranking second in Asia after Japan.
“China’s financial opening up to the world not only provides a new source of funding, but we believe it should also lead to a more-diversified and stable global investor base. It would remove the barrier between the Shanghai and Hong Kong exchanges. It may even serve as an example for collaboration between other bourses in the world,” Mr. Sun said.
Although they face intense competition from bigger players, Hong Kong’s stock brokerages are lucrative. Total net profit of the brokers in the city—including foreign firms—was US$581 million (4.5 billion Hong Kong dollars) in the first half of this year, up 41 per cent from the second half of last year, a report by the Securities and Futures Commission shows. Trading volume by brokers rose 7 per cent in the first half of the year to US$2.57 trillion, compared with US$2.4 trillion in the second half of 2013.
But local stockbrokers have seen their share of the market erode since 2003, when Hong Kong scrapped a lower limit on brokerage commissions. This allowed larger companies to undercut the small brokers on trading fees. The 14 largest securities firms in Hong Kong accounted for almost 57 per cent of trading on the city’s stock market as of June this year, compared with 51 per cent in 2004.
The firms being eyed by Chinese acquirers include two asset managers based in the city. While the opening of the trading link is expected to create additional interest in fund-management firms, the sector is already growing. In Hong Kong, assets under management rose 38.5 per cent last year from a year earlier, to US$1.47 trillion, according to data from the Securities & Futures Commission.
